Richard Amoroso, an insurance attorney at Polsinelli Shughart LLC in Phoenix, said the FDIC is ultimately aiming to recover losses from the deposit insurance fund by going after directors’ and officers’ insurance policies, which tend to have deeper pockets than individuals.

That theory is borne out in the FNB case. Regulators weren’t just after settlement agreements with Phil Lamb and Gary Dorris or the OCC consent orders and fines involving Pat Lamb and Ray Lamb. When Syndicate 2003 at Lloyd’s (Lloyd’s of London) refused to be held liable, the FDIC also made claims against five other executives tied to their conduct as former directors and officers of FNB, according to FDIC settlement papers.

In exchange for an agreement from the FDIC that it would not pursue further litigation against them, seven former FNB Arizona executives also agreed to waive their right to sue Lloyd’s of London or to collect any payments against the insurance carrier. They are:

FNB actually had two separate insurance carriers: Chubb Corp, which insured the bank's directors and officers up until June 2008, and Lloyd’s of London.

As the bank was faltering, FNB executives sought a new insurance carrier because their policy with Chubb Corp. was about to run out. By that time, FNB had assumed great risk, and the bank executives struggled to find an insurance company admitted in Arizona that would write a new policy, according to court papers.

Lloyd’s of London agreed to provide $10 million in coverage in exchange for a $200,000 premium in June 2008, according to court records. All three banks (FNB Nevada, FNB Arizona, and First Heritage Bank) owned by FNB failed less than a month later in July.

When the FNB executives informed Lloyd’s of London they were being pursued by the FDIC, the insurance carrier refused to provide coverage or to advance defense costs.

Bankers inside the settlement negotiations said that it was when Lloyd’s of London denied coverage that the FDIC said a lawsuit against Gary Dorris and Phil Lamb needed to be part of the wider settlement deal. That’s because without a legal judgment, it was impossible for the FDIC to attempt to recover money from the $10 million Lloyd’s of London insurance policy.

When the seven former FNB bankers flew to New York in May 2011 to mediate the FDIC’s claims against them, Lloyd’s of London refused to participate in the negotiations, according to court documents.

According to FNB executives who were part of the settlement negotiations in New York, a mediator bounced between rooms occupied by FNB bankers, the FDIC and Chubb Corp. trying to broker a deal. Under the terms of the settlement with the FDIC, Chubb agreed to pay the full $10 million limit of its policy ($7 million to the FDIC and $3 million to cover defense costs of the FNB bankers), Pat Lamb paid $10,000 and Ray Lamb paid $3.5 million to the FDIC.

Greg Hernandez, a spokesman for the FDIC, said the agency does not comment on individual lawsuits or pending litigation.

In October 2011, the FDIC filed a $43.5 million lawsuit against Syndicate 2003 at Lloyd’s (Lloyd’s of London) on its $10 million policy, alleging that as a result of the insurance carrier’s actions, the former FNB directors and officers were left to defend the FDIC’s claims without the insurance coverage for which they had paid.

That lawsuit still has not been resolved.

Questions in the aftermath

The handful of FDIC settlement agreements with former bankers so far demonstrate the agency’s steep hurdles in recovering anywhere close to the roughly $90 billion the deposit insurance fund lost on about 400 bank failures.

Many experts familiar with the banking industry have raised questions about the agency’s willingness to settle for so little in these early settlement agreements.

There are number of plausible reasons.

Speaking at a gathering of community bankers at the Arizona Biltmore Resort in January, Steven Anderson, who leads Atlanta-based Beecher Carlson’s executive liability practice, said bank executives tend to carry less insurance coverage than executives in other industries. In some cases, that means a banker’s insurance policy will often only cover a fraction of the amount that the FDIC hopes to recover.

The individual insurance liability policies also can be very tricky. Anderson said some policies have what are called “regulatory” clauses, which means the policy doesn’t cover any legal action brought against bankers by the Federal Reserve, the FDIC or the OCC. Some insurance carriers sell that as supplemental insurance, which means the banks would have had to purchase that additional coverage before they are sued.

While some bank executives may have significant personal assets to recover, others have been personally wiped out by the failure of the banks they used to run.

Phoenix bankers also have pointed out that it might be difficult for the FDIC to win a jury trial against executives in certain instances when the FDIC and OCC refrained from issuing formal enforcement actions before the bank failed.

The complexity of those arguments also is exemplified by the FNB lawsuit and subsequent settlement.

At the heart of regulator’s claims against the FNB executives is not only the fact that FNB was making non-traditional Alt-A loans, but how quickly executives should have closed the mortgage division once the bankers knew trouble was underfoot.

While the mortgage division was shuttered in August 2007, regulators at the FDIC and OCC say Pat Lamb and the other executives should have closed the mortgage division much earlier.

According to the OCC consent orders against Pat Lamb and Ray Lamb, and the FDIC’s lawsuit against Gary Dorris and Phil Lamb, the bank continued to take the loans it could not sell into its portfolio long after the executives should have known better.

Regulators allege the bank originated $1.5 billion of unmarketable Alt-A loans between March 2007 and August 21, 2007 which then resulted in more than $270 million of operating losses.

The bankers though, point out that OCC regulators consistently gave FNB Arizona the second-best rating when evaluated for capital adequacy, asset quality, management administration, earnings, liquidity and sensitivity to market risk from 2002 until 2006.

Regulators also acknowledged they did not move quickly enough to issue enforcement actions against any of the three closely held banks owned by First National Bank Holding Co., according to a material loss review of the banks by the FDIC Office of the Inspector General.

Sitting outside a Scottsdale Starbucks in late January of this year, Pat Lamb said looking back at the decisions made in February 2007, it was impossible to anticipate the magnitude of the market downturn and that the executives feared they were going to lose even more money by immediately closing the mortgage division — which involved laying off more than 1,000 employees and closing dozens of offices.

He also said the $1.5 billion the FDIC alleges the bank originated between March 2007 and August 2007, would have included loans that the bank was legally obligated to close because borrowers already had been given firm commitments. He estimates that the amount of those so-called “locks” could have been more than $500 million.

Even after the mortgage division had been closed, Pat and Phil Lamb said their family’s $45 million investment demonstrated they had great faith the market was going to rebound and their commitment to working with regulators to salvage FNB.

Phil Lamb, who ended up on the FNB lawsuit, said it is much easier to see some of the red flags with the benefit of hindsight, rather than when they were in the fray, fighting to save the bank their father founded.

In an email to the Phoenix Business Journal, Phil wrote, “At the end of the day, the financial crisis was so severe that the only way for FNB to avoid failure would have been to exit the mortgage and real estate businesses in 2005…With the benefit of hindsight, people may say that they saw the crash coming. That wasn’t the reality in 2005. Nobody saw anything of this magnitude coming.”